Concept of the Enlightened Millionaire

I was reading this book "The one minute millionaire" by M. V. Hansen & R. G. Allen.

Was inspired by their concept of the "enlightened millionaire".
The idea is about wealth creation for self and value creation for society.
Their concept is that wealth comes with responsibilities and believe in taking a principled approach:

1. Do no harm - in creating wealth, avoid activities that harm or impoverish others.
2. Do good - in creating wealth, focus on activities that improves the life of others (value creation).
3. Sharing & Giving - in creating wealth, to share & give back to society.
A concrete action that the authors encourage is to donate 10% of earnings each year.

I am inspired by their idea of living a life of BOTH abundance AND altruism =)

Berjaya Sports Toto

Added a little at RM3.90.

On Economic Moat:
Think Singapore Pools, but in Malaysia (but note that there are other operators as well).
I like this type of business which is based on well established habitual patterns of everyday life.
This means that it is stable and predictable over the long term.
While it is not a monopoly (there are other operators in Malaysia), this sector is heavily regulated by the government.
Hence the regulation does translate into some kind of economic moat for the existing operators (as long as they do not get into trouble with the regulators I guess).
And when I look at its financial statements, the stable earnings over the years is consistent with the storyline above.
Earnings wise, it seems to be range-bounded, so while it is predictable, I am not expecting growth.
The financial statements also reveal that this company has a generous dividend pay-out guideline.
In other words, I see this as a dividend play.
Note that there was an earlier plan for a Business trust listing on SGX but was scrapped due to poor biz trust performance on SGX (I think).

On Margin of Safety:
I think it is probably at fair value around RM4, PE about 15x, the margin of safety, by definition, is very small.  But my decision to go ahead comes from my expectation of the predictability of its future earnings.

Dividend: It has an excellent track record (not less than 75% dividend pay-out ratio).
I am expecting dividend pay-out to hover anything between 25-30 cents for the foreseeable future (assuming approx. 90% dividend pay-out ratio, which in some ways reminds me of a REIT), so that is about 6.5% - 7% yield at current prices.

Debt: Gearing is low at around 20% , so I am not overly concerned, especially in light of the predictability of its cash-flow.

Additional Risks: But I have to be aware that this being a Malaysian stock, means that there is additional elements of country and FX risk.

Fraser Centrepoint Trust

Added a little at SGD1.75.

On Economic Moat:
This is a Retail REIT owning suburban malls.
In a country like Singapore where the favourite pastime is shopping, I am expecting this type of REIT to be quite stable & predictable over the long term.
Northpoint and Causeway Point, which are the main assets of this REIT, are quite strategically located in the North without any other significant malls nearby to challenge their positions.

On Margin of Safety:
Its NAV is currently estimated at 1.77, hence it is almost at fair value with minimal margin of safety.
However I see myself paying for quality.
I like its excellent track record in increasing its DPU steadily over time.
There could be further DPU growth in view of some rental renewal after AEI and the possible injection of Changi City Point in the not too distant future.

Dividend: Current dividend yield is about 6.3% which meets my expectations. 

Debt: Gearing is less than 30%, effective interest rate less than 3% and interest coverage ratio more than 6 times, it sounds reasonable to me.  This is important, especially with the impending rise in interest rate due to QE tapering (which I suppose is a question of when not if), I need to be assured that the interest rate hike will not "kill" this REIT.

On Margin of Safety

Once I have determined that there is a sufficiently strong and sustainable economic moat surrounding the "business of interest", the next thing is to decide what price to buy it.

We determine the value of the business for ourselves and then compare to market price, if the market price is less than the value, we say the business is undervalued. (like when we go shopping and we see some discount and determine that it is a bargain). If the market price is more than the value, then its overvalued.

The difference between the market price and the value is our margin of safety. The larger the better as it means how much of a bargain we are getting the business at the prevailing price.

When determining the value of the business, value investors use anything from simple ratios like the PE and/or PB ratio, to more sophisticated means like the discounted cash flow method. 

Note: On top of the economic moat & margin of safety considerations, I also pay special attention to Dividends and Debt Levels

Dividends - My primary purpose is to invest for passive income, hence I am quite biased towards a business that pays good dividends.  On my watch-list, quite a number of them are "dividend stocks" and REITs that pay generous dividends.

Debt Levels - Being risk adverse, I am uncomfortable to see businesses with high level of debts. Hence I can sometimes be quite biased towards businesses that are net cash.  Higher level of debts usually means taking on more risks for the company, and question is always whether it can survive an economic crisis.

There are other things that I look out for in a business when I invest, but to keep things simple (and probably also because I am lazy =P) I have highlighted only the key ones above.

To learn more about value investing for beginners like myself, I would recommend starting off with the book on "value investing for employees" by Clive Tan which I find offering a very sound framework and an easy read.  Its a book on value investing written by a Singaporean for Singaporeans (it includes the Singapore context when discussing some of the details which can be very useful as the Singaporean reader can easily relate to them).

On Economic Moats

Why it is important
This term is popularised by Warren Buffet and used as part of his decision making process on whether he should or should not invest.  A business with an economic moat means, like a moat around a medieval castle, it is able to protect itself.  For the business it means it is able to protect its earnings over the long term.

It is important for me when I invest, that I can see the presence of an economic moat around the business, especially when I am in for the long haul.  If I can assure myself that the earnings are protected over the long term, then I can sleep peacefully at night without worrying if the business will "close shop" tomorrow.

So the question is, "Is the business able to protect its earnings over the long term?"

Qualitative aspects
Businesses protect their earnings in many different ways, some of my favourite ways include:
Those moats that are result of having no choice or not much of a choice.

Think of a Toll Bridge. (e.g. CM Pacific which owns toll bridges in China is listed on SGX)

Think of a local newspaper monopoly. (e.g. SPH is listed on SGX)

While there are potential challenges such as the internet challenge for the traditional newspapers but lets keep things simple for now.

Another type of moat would be the result of brand differentiation.

E.g. Montessori Pre-School Education.  As a parent of a toddler looking for good pre-school education, I am actively sourcing for pre-school options which are proven and well established.  Immediately Montessori came to my mind as opposed to any "run of the mill" pre-school. It is an established brand with sound philosophies and methods accompanied with a century of proven track record. (not listed)

Quantitative aspects
Just depending on qualitative understanding is incomplete, I will also need to take a look into the financial statements of the business.
The numbers will paint a picture of how well the business has been protecting its earnings.
While past performance does not guarantee future results, a long consistent track record of strong earnings and return on equity over many years would suggest the presence of a sustainable moat and would give us at least some assurance of repeated success as compared to say, a business with a track record of inconsistent earnings.

With both the qualitative and quantitative aspects aligned and "singing the same song", I would feel more confident of the business and put it under my "watch list".

Then with an appropriate "margin of safety", it becomes a signal for me to buy.

Framework of this Blog

Dear Friends,

I want to clarify the framework of this Blog.
I just began my value investing journey, and this blog is meant for me to pen down and hence clarify my own thoughts on the subject of value investing as well as to share with my friends.
Therefore whatever is written here are from my own amateur ramblings and NOT expert nor well-researched opinions please.

My investment philosophy is as follows:

(Why invest) Invest for passive income;
(Invest in What) Find Economic Moat;
(When to invest) Have a Margin of Safety.

Being an ordinary salaried employee, investing is a weekend job (mainly the stock market) with the aim of trying to create a steady stream of passive income to sustain me and my family (sole-bread winner) when I eventually retire.  Learning from the investment methods of Warren Buffet and value investors, I try to find businesses with a sustainable economic moat, evaluate their intrinsic value and buy them at a price with a reasonable margin of safety.

Note the words trying in my sentences, I realised that there is a psychological or emotional dimension to investing that I need to overcome, i.e. sometimes decisions are made from emotional considerations rather through logical thinking haha =P
Also partly the reason for this blog, as I find the writing process helpful in the clarifying the thought process.